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Wednesday, May 30, 2012

Fixing the Illinois Pension Ponzi Scheme

Public employees and labor unions don't want to give up their automatic 3 percent annual increases, so legislators, who helped create the pension ponzi scheme of Illinois before being faced with the fiscal reality the system is about to implode and there's no way to finance it without a significant change, are using a common tactic of the Chicago Political Mafia...you do this or we do that.

Basically, in order to force public employees and labor unions to agree to a reduction in future benefits, the plan is to offer a "choice." Either change to reduced increases or lose retirement health insurance, which is not protected by the constitution and not technically "required" to provide.

However, while most taxpayers would likely agree with any solution that reduces their overall burden, Chicago politicians (Mike and Lisa Madigan) want to also shift pension costs for teachers to school districts, which means property tax owners and severe increases.

That part of the proposal won't fly, according to Illinois House Minority Leader Rep. Tom Cross.

SPRINGFIELD — A pension reform plan that aims to save tens of billions of dollars surfaced at the Capitol today, but questions remain about a controversial provision to shift suburban and Downstate teacher retirement costs onto local school districts.

A House panel voted 6-3 to advance the pension measure, the first of several steps required to approve the changes before Thursday night’s adjournment deadline.

Democratic House Speaker Michael Madigan presented the legislation that he said would scale back costs and potentially put Illinois on sound financial footing. Madigan outlined the plan with the endorsement of the Quinn administration, whose budget chief Jerry Stermer maintained the state cannot fix the state's $83 billion problem of underfunding pensions with "baby steps."

"Unless we do something bold, we have failed all of Illinois," Stermer said.

The package hinges on giving current employees and retirees a choice: they can accept retirement plans with smaller cost-of-living increases and get a guarantee of health insurance, or keep higher pension bumps but get no health insurance.

The bill also would gradually shift teacher pension costs over several years to school districts. Critics say that could result in property tax increases, especially in the suburbs. House Republican Leader Tom Cross said he opposes this provision, but would support the pension reforms if it were removed.

The proposal immediately got branded as "unfair and unconstitutional" by IllinoisAFL-CIOPresident Michael Carrigan. John Stevens, an attorney for a union coalition, said there is "no question" the proposal violates the state constitution's provision that says a public pension cannot be diminished or impaired once established.

And the head of the American Federation of State, County and Federal Employees contended the bill would return Illinois to the days when a retiree will be "living at or near the povery level."

Tyrone Fahner, a former attorney general representing and president of the Civic Committee of the Commercial Club of Chicago, agreed that union workers have kept their part of the deal by making payments over the years and the state officials shortchanged them. Fahner maintained the bill is constitutional despite the questions of whether the it would impair retiree benefits. He said the "ultimate impairment would be your failure to act" because it could lead to a pension system that would eventually implode.

Jim Bachman, executive director of the Illinois Retired Teachers Association, said educators accepted modest salaries over the years on the belief that they would have secure retirements.

"It is unconscionable to pull the rug out from under retired teachers," Bachman said.

At the center of that move is an effort to drop an annual 3 percent increase in pensions that are based on compounded interest. The state instead would base increases on half the consumer price index or 3 percent, whichever is less, and use simple interest.

Take a government worker who starts out with a $10,000-a-year pension. Now, he's guaranteed a 3 percent yearly increase. In the second year, that means his pension base jumps to $10,300. In the third year, it grows to $10,609, then to $10,927 in the fourth year.

Under the new system, each year's pension increase would be calculated on the base and not include increases from previous years. That means for someone who retires with a $10,000 pension, the most it would increase would be $300 a year — less if inflation is under 3 percent.

To get around constitutional concerns, as described in a House pension panel today, a retired worker could keep collecting 3 percent annual cost-of-living increases based on compound interest but would have to give up access to a retiree health care plan. At the same time, a retired worker willing to take the lower cost-of-living adjustment would have the opportunity to stay in the state's health insurance plan, said Rep. Elaine Nekritz, D-Northbrook, a key pension negotiator.

Current workers also would have choices. Workers willing to accept a lower pension cost-of-living increase would be eligible for whatever health care plan is in place when they retire. In addition, future salary increases would be calculated into the size of their pensions, Nekritz said.

But current employees who want to keep the 3 percent compound interest in their pensions would be unable to count any more pay raises into the salary that their retirement checks are based upon. They'd also lose any state health care when they retire.

Nekritz said another change being considered would delay the start of giving cost-of-living adjustments to retirees. Under that scenario, cost-of-living increases would start at either age 67 or five years after retirement, whichever is earlier.